UPDATE 1-Norway's c.bank to proceed with caution on rates, defends inflation target system

(Adds quotes, background)

OSLO Oct 11 The effects of changes to monetary
policy are less predictable when interest rates drop towards
zero, Norway's central bank governor said in a speech on
Tuesday, while arguing that the current system of inflation
targeting should stay in place.

"The policy rate in Norway has come down to a low level,
approaching a lower bound. This has increased the uncertainty
about the effect of monetary policy," Governor Oeystein Olsen
told a conference on monetary policy.

"Over the past year, Norges Bank has therefore reacted
somewhat less to new information, whether the information has
pulled in the direction of a lower or a higher policy rate, than
it would have done in a more normal situation. It has been
appropriate to proceed with caution," he added.

The central bank last cut its key policy rate in March, to
an all-time low of 0.50 percent, and has said it will most
likely stay at this level for the next few years.

The governor defended the country's system of inflation
targeting, in place since 2001, ahead of a planned review by
Norway's Finance Ministry.

"After 15 years of the current regulation, a review is in
order. I would, however, emphasise that our experience of the
current framework is positive. This suggests a need for
adjustments rather than a regime change," Olsen said in prepared
remarks.

The central bank targets year-on-year core inflation of 2.5
percent over time. On the sidelines of the conference, Olsen
said the policy had served the country well.

"The signal from me is that we don't need to consider an
alternative to the goal of obtaining low, stable inflation,"
Olsen told Reuters.
(Reporting by Ole Petter Skonnord, writing by Terje Solsvik,
editing by Gwladys Fouche)

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